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KATRINA: Small Clause, Big Problem

by Joseph B. TreasterThe New York Times
August 4th, 2006

Marilyn Haverty, whose house in Waveland, Miss., was buffeted by wind and surging water in Hurricane Katrina, thought her homeowner’s insurance would cover at least the wind damage. But it never paid her a penny.

As it turns out, Ms. Haverty’s insurance policy, like nearly every one around the country, said, essentially, that if the house was damaged by a flood or earthquake or something else not covered, it did not matter that she had coverage for wind damage. There was no coverage at all.

Since at least the mid-1980’s, insurers have been putting into their home insurance policies “anti-concurrent causation’’ clauses that effectively eliminate coverage that insurers promise to provide when selling their policies. But most people skip over the legalistic language — if they read their policies at all. And until Katrina, there had never been such an outpouring of challenges.

“There’s no question that the anti-concurrent clause is bad for policyholders,’’ said Adam F. Scales, an associate professor who teaches insurance law at the Washington and Lee University School of Law, in Lexington, Va. “It’s not fair because it defeats policyholders’ reasonable expectations.’’

Insurers counter that they need the clause to protect themselves from being drawn into paying for floods, earthquakes or mudslides and other widespread calamities that are beyond their scope and that they specifically refuse to cover.

The insurance companies say they expect to pay out $17.6 billion for homes damaged in Katrina and $20.8 billion to businesses — the most insurers have ever paid out in a catastrophe. But lawyers for homeowners say the insurers would have had to pay out perhaps billions more had it not been for the anti-concurrent clause. Industry officials said they had no comprehensive data, but acknowledged that a substantial amount of money was at stake.

The provision has become one of the central issues in the thousands of lawsuits that have been filed against insurance companies since Hurricane Katrina hit last August.

In the first trial, which began in July and is now awaiting a federal court judge’s verdict, the homeowner’s lawyer, Richard F. Scruggs, argued that the storm surge in Katrina was not a flood — as defined by the insurance companies — but an inseparable part of the hurricane. Mr. Scruggs also argued that his client, Paul Leonard, a police lieutenant, was told by his agent that he did not need to buy flood insurance. Mr. Scruggs contended that the anti-causation clause should be voided.

The insurance companies say they paid for damage to homes in areas where there was no flooding. Where there was flooding, they say, they paid for damage that could have come only from wind, like the loss of a roof and broken upper-story windows — above the highest marks left by flood waters. But they have generally refused to pay for damage to houses, or parts of houses, that were hit by both wind and flood water.

“They are sitting on this idea that the water washed everything away and whether there was any wind damage or not, they don’t feel they have to provide any coverage,’’ said Zach Butterworth, a lawyer in Bay St. Louis, Miss., who, with Mr. Scruggs, is representing Ms. Haverty and dozens of other storm victims.

Courts around the country have been divided on whether the provision may be used to deny coverage. Many have backed the insurers. But other courts have sided with policyholders, concluding that the clause was ambiguous or ran counter to reasonable expectations of what was covered.

“It is not a settled issue,’’ said E. Farish Percy, a law professor and insurance expert at the University of Mississippi. “Courts that have decided in favor of plaintiffs are saying, ‘It may be perfectly clear to an insurance lawyer, but it’s not that clear to a policyholder.’ ’’

Insurers and other insurance experts say the only way policyholders can protect themselves is to take on the additional expense of buying special government policies that cover floods and earthquakes. But that is only a partial remedy for more expensive homes that are flooded, because the federal government limits coverage for floods to $250,000. Earthquake insurance sold by California carries a high deductible.

Robert P. Hartwig, the chief economist at the Insurance Information Institute, a trade group in New York, said the insurers priced their policies in the expectation that they would not be paying for damage in combination with flooding. Otherwise, Mr. Hartwig said, premiums would be much higher and some insurers might decide not to offer coverage on homes at all in certain areas.

Without the provision, he said, “if a home is destroyed by an excluded peril like flood, but the damage occurred in connection with another peril like wind, you’d effectively be saying that, in effect, flood coverage is provided.’’

In papers filed in the first trial in Mississippi, the Nationwide Insurance Company said the anti-causation clause “relieves insurers of the untenable task of proving a negative,’’ that is, “eliminating wind as a potential partial cause of the loss.’’

Even homeowners who say they fully understood that flood coverage was provided only by the government and had to be bought separately say they expected to receive at least some compensation for wind damage since both wind and water harmed their homes.

“I thought I would get something,’’ said Ms. Haverty, who retired in January as the assistant branch manager of a bank. During the storm, Ms. Haverty said, pine trees near her house were snapped off high above the ground by strong winds.

But, she said, State Farm told her: “No, we’re not paying you anything on the wind. It was water.” State Farm declined to discuss the case. Ms. Haverty was one of the relative few in Mississippi who had federal flood insurance, and she received $93,900 on that policy. Like many others whose insurers did not pay, she has applied for a federal grant. Congress has committed $15 billion to help with rebuilding for people who had no flood insurance or not enough and who received partial or no payment from their insurers.

The insurers say they spell out their terms of coverage in their policies. But even lawyers representing insurance companies say customers do not always understand the limits of their coverage.

“When you look at anti-causation language, it just doesn’t look that important,’’ said Randy J. Maniloff, a lawyer at White & Williams in Philadelphia who represents commercial insurance companies but is following insurance developments along the Gulf Coast. “They don’t appear to be words of substance. But they’re actually enormously important.’’

In the Nationwide Insurance Company’s home insurance policy, which is being debated in the Mississippi trial, the anti-concurrent language precedes a list of things not covered. “We do not cover loss to any property resulting directly or indirectly from any of the following,’’ the passage begins. “Such a loss is excluded even if another peril or event contributed concurrently or in any sequence to cause the loss.’’

The insurers point out that in most states, insurance regulators approve the language in their policies.

But insurance experts said that was not necessarily a test for fairness or consumer protection. “The regulators look a lot more carefully at rates than they do at policy terms,’’ said Gary S. Thompson, a lawyer at Reed Smith in Washington who represents commercial policyholders but also follows home insurance issues. “It’s really the courts that cause insurance companies to go back and re-examine their coverage terms.’’

In questions about the anti-concurrent clause at the Mississippi trial, John Griffin Jones, a colleague of Mr. Scruggs, raised the prospect of a tree theoretically crashing through the roof of a house and rain water pouring in. If nothing else happened, all the damage would be covered. But, Mr. Jones asked, if a storm surge came two hours later and flooded the house, would everything below the water line be excluded from coverage?

“Yes, sir,” Jeffrey Kline Gilbert, an executive in charge of Katrina claims at Nationwide, replied.

“Under the anti-concurrent clause provision, right?’’ Mr. Jones asked.

“Yes, sir.’’

Then, Mr. Jones asked: “How is a guy like Paul Leonard going to know that when he is buying one of these policies? How is he going to know it is going to get that technical that you have an anti-concurrent clause provision that if any water touches the property, he is on his own?’’

“First,’’ Mr. Gilbert said, “by reading the policy.’’



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